Our government has a long history of championing the cause of superannuation for all working Australians. It was a Labor government which introduced the first fundamental superannuation reforms.
The introduction of compulsory superannuation has had a significant and continuing impact on Australia's economic health, and the retirement savings of Australian workers.
This reform extended superannuation coverage to nearly all employees. Importantly, if the Government had not introduced the superannuation guarantee arrangements in the early 1990s, then it is unlikely that the majority of low income, casual or part-time workers in industries such as hospitality and retail would have added financial security for their retirement incomes today.
As Australia's first Minister responsible for superannuation in any government I bring together a range of areas in both Treasury and Finance. These include:
- Policy and administration, including taxation and prudential regulation, in relation to superannuation;
- Corporate governance encompassing administration of the Australian Securities and Investments Commission and representation on the Ministerial Council for Corporations;
- Financial literacy;
- The Royal Australian Mint; and
- The Australian Government Actuary.
Since the introduction of compulsory superannuation, individual superannuation balances have grown to the point where today they represent, for many people, their most significant asset aside from the family home.
Compulsory superannuation has also provided working Australians with a more comfortable and secure retirement.
Under a fully mature superannuation guarantee system, a male worker on three quarters of Average Weekly Ordinary Time Earnings, was projected to have an expenditure replacement rate of 74 per cent after 35 years of contributions. Following the recent superannuation reforms, which the Government supported, this replacement rate has increased to 80 per cent.
Compulsion and "duty of care"
Compulsion brings with it a strong "duty of care" by government.
Government, having rightly mandated individuals to save for retirement, provides significant tax concessions, estimated in the latest Tax Expenditure Statement to be around $26.8 billion in 2007-08, and directs the savings largely into the hands of private sector financial institutions governed by trustee entities. Given superannuation represents long term savings that are not accessible until at least age 55, issues such as governance, dispute resolution and compensation, safety and operational costs are important concerns for this Government.
The central question for all participants in our system, regardless of their particular interest, should be what is in the best interests of the member and maximises their retirement income?
Principles
There are a number of interlinked principles the Government has outlined over the past few years. They are worthwhile recounting because they will form the basis for how we examine issues going forward.
- Achieving higher retirement incomes delivered over time through a combination of the age pension plus superannuation set against a clear goal;
- Simplicity - each fund member should be able to understand at least the general features of operation of the system and the particular features of their own fund. Safe, high quality default mechanisms may be desirable to minimise decision making where individuals fail to make an active informed decision.
- Safety and certainty - features to ensure people maintain confidence that contributions will be made, that their future income is not at risk, and that they can predict with reasonable certainty the income available to them on retirement; I draw a distinction between the risk from theft and fraud and market based risk in a defined contribution system.
- Choice and competition - the provision of a level of choice so that individuals can have input into selecting superannuation options that best suit their particular needs for retirement, whether it be a particular fund, investment category, lump sum or pension/annuity, or age of retirement;
There is a need to ensure a careful balance in a system which denies individuals the choice not to participate in the system but requires them to make what can be a range of complex choice options within the system itself.
- Affordability - superannuation should be a cost effective savings vehicle with operating costs kept to a minimum;
- Improved incentives - superannuation should be taxed in a fair and equitable manner, and we need a range of measures to ensure that retirement savings are increased and that individuals are given additional incentive to contribute regularly to those savings. Any such measures need to be carefully designed and targeted.
There are some further practical considerations I would add:
Increasing workforce participation
Given the recent high levels of employment and the significant skill shortages that have developed in sections of our economy, there is an urgent need to encourage Australians to participate in the workplace for as long as possible.
Mature aged people play an important role in the Australian workforce. The trend towards early retirement together with the ageing of the population means that Australia is facing reduced growth in the working age population in the future. As a result labour force participation by mature aged workers will become increasingly important for both the individual and the nation. The superannuation system currently provides people aged 65 and over with a number of options to help them meet their financial needs. These include a person choosing to continue to work and either retaining their benefits in superannuation or accessing their superannuation as additional income to supplement their wages or salary, or accessing their superannuation benefits at any time and retiring from the workforce. Other provisions are provided for those under 65, such as early release and permanent incapacity.
Administration overload
I am also conscious of the great pressure which fund administration systems, IT hardware and software have been under due to a number of recent policy changes such as Better Super and Anti-Money Laundering.
I can assure you this is being taken into account in developing new policy such as the first home saver account and in considering other issues such as the automatic 'rolling together' of lost accounts.
Hopefully further changes can be made that further simplify the administration, operation and decision making in our still very complex system.
However, there are a number of areas in the superannuation system which are of concern to the Government. These include: the level of lost superannuation; the simplification of product disclosure statements; and the previous Government's intent to exclude superannuation provisions from awards.
Today, I wish to cover these issues and the Government's first home saver account.
Lost Superannuation
An issue I have been following with concern for some time is the continued growth in the amount of superannuation reported on the Lost Members Register. The register, which uses information supplied by superannuation funds, is intended to assist individual members to identify their superannuation and consolidate their accounts. Monies associated with the accounts on the register are still held by the funds on behalf of the lost members. In late 2007 there were nearly 6.3 million accounts on the register, totalling approx $12.7 billion.
This is a worryingly large figure. I do note, however, that the definition of lost member is drawn very widely to ensure that any account which could possibly be 'lost' is reported to the register. I am sure a significant number of these accounts could be more correctly defined as 'inactive', as the account owner is aware of the account, but not motivated to do anything about it.
Nevertheless, the growing amount of superannuation identified as lost superannuation has been a significant issue over the last decade. At 30 June 2001, 3.8 million accounts with a total value of $5.5 billion were reported on the Lost Members Register, as noted earlier, this has grown to 6.3 million accounts with a total value of $12.7 billion.
Lost accounts represent approximately one in five of all superannuation accounts, with an average of one lost account for every two Australian workers. The sizeable number of these accounts suggests many Australian workers will access less savings on retirement than they are entitled to. In addition, the number of these accounts collectively increases superannuation fund running costs.
The previous Government's attempt to address this failure of the existing system by tracking down lost members through a mail-out is complex and costly. There is currently a lot of red-tape involved - individuals have to find the fund, find the account, fill in forms, and provide proof.
The Government will carefully examine appropriate steps to rationalise the register. I have expressed a preference for the option of reuniting Australians with their lost accounts by introducing an automatic consolidation system using our Tax File Number system. Under this option, the Tax File Number would be used to automatically transfer lost accounts into the current or last active account. Over the course of the year we will be consulting with the superannuation industry on a range of options.
In deciding on an appropriate approach to these issues, the Government will attempt to balance a number of objectives of superannuation policy, including facilitating individual choice and participation in superannuation decisions more generally, ensuring security of funds, maximising retirement incomes, and reducing complexity and red tape.
Simplification of Product Disclosure Statements and intra product advice
I noted earlier that in allocating ministerial responsibilities, the new Government has recognised the importance of superannuation with the creation of the role of the Minister for Superannuation and Corporate Law.
It is important to me that investors have access to, and understand, the relevant information with which to make decisions about their superannuation. A major issue with this respect is the quality and length of disclosure documents. With my new responsibilities as Minister, I am enthusiastic about starting to fix this problem and I would like to see industry providers committed to producing simple, standard and most importantly, readable financial services disclosure documents.
The Minister for Finance and Deregulation, the Hon Lindsay Tanner MP, and I have set up a tripartite Financial Services Working Group comprised of Treasury, the Department of Finance and Deregulation and ASIC officials. The Working Group will examine disclosure documents in a staged process to facilitate short, simple and readable documents to better enable consumers to understand and compare products. This will assist consumers in making important decisions about their financial futures.
The Working Group will also examine the issue of "within product" or "intra-product" advice in regard to superannuation products. The Working Group will identify the obstacles to providing this advice, with a view to improving access to such advice for all Australians. To this end, I would like to acknowledge the work the Industry Super Network has begun through engaging with the Government to present its ideas on this issue.
The Working Group will be conducting robust research and where necessary consumer testing to develop solutions that get to the heart of the problems identified. I expect the Working Group will seek your involvement as part of its consultation with all stakeholders to deliver the best outcomes.
As we know, there are many important decisions investors can be faced with in regard to choice of superannuation fund and other aspects of planning for their financial futures. I am keen to give consumers the best tools possible to help them make informed decisions about their financial futures, and I look forward to working with you on these issues in the future. I am encouraged to note that the Industry Super Network offers a financial advisory service in the form of Industry Fund Financial Planning to assist fund members achieve their financial goals, with the first session provided free of charge to members.
Advice which assists investors to make informed decisions about their significant investment in a superannuation fund is of paramount importance. It is my aim to assist investors in accessing that advice. In particular, once an investor has made a decision with regard to the superannuation fund they are comfortable with, I consider it important that their investment in that fund works in the best possible way for them.
Superannuation provisions in the award system
The Government believes workers should be protected in the workplace by a strong safety net which ensures their rights and conditions are not bargained away unfairly. To uphold this ideal the Government will introduce a genuine safety net to ensure employees are fairly rewarded for their hard work.
An important component of this safety net is the award system. Awards are a key means of ensuring worker's conditions are properly protected. The Government intends to modernise and simplify the award system to protect worker's conditions.
In 2008 the Australian Industrial Relations Commission (AIRC) will begin the task of simplifying and modernising awards. With more than 4300 awards to be modernised the process will be conducted as rapidly, efficiently and fairly as possible. The process will occur in an open and transparent manner, with the AIRC receiving submissions and hearing from those who will be affected by the new modern award system.
The Award system will be modernised based on 10 basic award conditions so that entitlements such as penalty rates and overtime are properly protected. Superannuation is one of these ten conditions. The Government believes that although the Age Pension provides a safety net for older Australians with little or low levels of retirement savings, it is superannuation that is the key to higher incomes in retirement.
Many of you will be aware that the previous Government put in place arrangements to have superannuation cease to be an allowable matter in awards from June 2008. You may also be aware that this Government indicated it would reinstate superannuation as an allowable award condition in 2010.
We are aware this will create a gap in coverage and we do not wish to cause unnecessary disruption to business. The issue is currently under consideration and the Government will carefully examine all of the issues before making a decision. This issue also has ramifications for default funds.
Under the choice of fund law, employers are required to select a "default fund" to make their superannuation guarantee contributions into if the employee does not complete a standard choice form. If a superannuation fund is nominated in the federal award covering the employee, then that is the default fund into which the employer should make their contributions to meet the choice of fund requirements.
The default fund nominated must be a complying superannuation fund and must provide minimum insurance coverage to the member i.e. the employee.
If an applicable federal award does not specify a particular fund, the employer can nominate their own default fund. If an applicable federal award specifies a number of funds, the employer must nominate one of them as the default fund.
If superannuation is not an "allowable matter" in awards, as the former Government had intended to be the case from 1 July 2008, the subject matter will be governed by legislation (such as the choice of fund law) and not by awards. This will mean awards can no longer nominate the fund into which employers should make contributions on behalf of their employees.
As indicated, I am examining how to best ensure appropriate default fund arrangements for employees.
First Home Saver Account
The Government is also committed to assisting aspiring first home buyers to save for a larger home deposit.
The financial pressures faced by first home buyers have increased, with the price of an average home rising more quickly than the average annual wage, and first home buyers spending a greater proportion of their total income on mortgage repayments than at the beginning of the decade. For example, housing costs for first home buyers as a proportion of total income have risen from 20 per cent in 1999-00 to 27 per cent in 2005-06.
One of the greatest obstacles to buying a first home is saving a deposit. In recognition of this and that home ownership is important to the wellbeing of Australians, in the 2007 election campaign, the Government undertook to introduce new, low tax, First Home Saver Accounts to assist first home buyers in meeting this challenge.
The Government approved the introduction of First Home Saver Accounts yesterday. The measure has considerably strengthened its announced approach by boosting assistance to low income earners, streamlining the operation of the accounts through an upfront Government contribution and improving accessibility by widening the range of account providers.
The Government will provide further details on the accounts in a consultation paper to be released in the near future.
The accounts will deliver benefits to savers over time which, with a minimum period of four years before withdrawal, will allow time for the supply of housing to respond to other government policies. Thus, the accounts will complement the Government's policies to increase the supply of affordable housing including the Housing Affordability Fund, National Rental Affordability Scheme and the release of surplus Commonwealth land.
Fiscal Responsibility
The Government has committed to exercising fiscal restraint through a disciplined approach to spending and a hardline approach to savings. Excessive government spending contributes to demand, which can add to inflationary pressures. A comprehensive review of spending is currently working to find additional savings above the previously identified $10 billion across the forward estimates.
In his first economic speech just a few weeks ago, the Prime Minister flagged that under point two of our five point plan to fight inflation, that this Government would examine all options to provide real incentives to encourage private savings.
It will be economically responsible for the Government to keep in mind its fiscal responsibility when making policy decisions over the coming year.
Conclusion
There are other issues I have not covered today - for example, providing a clearing house to assist employers pay contributions and the introduction of retirement income forecasts. However, I trust my talk today gives you some idea of the Government's priorities over the coming year.